ESG Viewpoint Climate risk management in the banking sector - BMO Global Asset Management
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Responsible Investment Solutions
ESG
Viewpoint
Climate risk management
in the banking sector
May 2021
Influencing financial intuitions for the future
Banks are under increasing regulatory and commercial pressure to protect their
balance sheets from the impacts of climate change, and to contribute to the
achievement of net zero greenhouse gas emissions by 2050 or earlier.
Nina Roth
We targeted 30 global and regional financial institutions for engagement around Director, Responsible
gaps in their approach to integrating climate change in the areas of governance, risk Investment team
management, scenario analysis and disclosures.
In 2020, we introduced a dedicated climate voting policy covering companies in
high-impact industries. Under this policy, we will vote against selected management
resolutions at companies that fail to meet our minimum standards.
Going forward, we will incorporate the lessons learnt from our engagement to
hold increasingly informed discussions with a wider range of financial institutions.
Ultimately, we want to help boards drive long-term sustainable differentiation in the Juan Salazar
marketplace for their firms, meet evolving stakeholder expectations, and manage Director, Responsible
climate risks and opportunities effectively. Investment team
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Our engagement expectations
Banks are under increasing regulatory and commercial frameworks, covering both lending and underwriting
pressure to protect their balance sheets from the impacts activities. We also expect banks and insurers to conduct
of climate change, and to contribute to the achievement climate scenario analysis and stress testing to help assess
of net zero greenhouse gas emissions by 2050 or earlier. their resilience to climate change, and inform their
They must act to embed climate-related risks in their climate risk management and wider strategic planning.
business operations and risk management frameworks.
Provide robust disclosure: we strongly
Doing so will not only help them mitigate transition and
encourage firms to report on their approach to
physical risks to their own operations and portfolios, but
managing climate risks and opportunities using
also identify opportunities to finance the transition to a
the Taskforce for Climate-related Financial Disclosures
low-carbon economy.
(TCFD) framework.
As part of a dedicated engagement project, we
targeted 30 global and regional financial institutions for
Discussions about firms’ approach to fossil fuel financing
engagement (24 based in developed markets and 6 in
were an essential part of our engagement. According to
emerging markets) – mostly banks but also a handful
a report by the Rainforest Action Network, the world’s
of insurance companies. We sought to encourage firms
60 largest banks have provided $3.8tn to fossil fuel
to address gaps in their approach to integrating climate
companies since 2016, when the Paris agreement came
change in the areas of governance, risk management,
into effect. The scale of continued lending presents a
scenario analysis and disclosures.
potential systemic financial risk, as fossil fuel assets
could become stranded, leaving the banks exposed to
In our engagement, we asked companies to:
bad debt.
Implement robust climate change
Most of our engagement has been on a one-to-one basis,
governance frameworks: Boards of directors
but we have collaborated where we have seen this has
are crucial in the governance of climate-related
more impact and is in line with our objectives. We joined
risks and opportunities. We have encouraged firms to
an investor collaboration led by specialists Asia Research
designate clear accountability for climate within the
and Engagement to engage Japanese and Chinese banks,
board, and to ensure that their boards have the right
and became active members of the banking workstream
knowledge and tools to discharge this duty.
within the Institutional Investors Group on Climate
Enhance climate risk management: We asked Change (IIGCC) that will engage with over 25 banks in
banks to integrate climate considerations into North America, Europe and Asia to encourage alignment
their financial risk management policies and with the goals of the Paris Agreement.
Interested in learning more? Keep on scrolling or click the quick links.
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Key findings
We have engaged banks and other financial institutions on climate risk management for over 10 years.
However, the focus achieved by developing and executing a dedicated engagement project has helped
accelerate progress.
Governance frameworks
1
A growing number of banks confirm that their boards have responsibility for overseeing management of climate-
related issues.
Increased attention to climate issues has resulted in the creation of executive committees or new roles to oversee
climate risk management activities at a handful of banks, including Barclays, HSBC, Citigroup and ING.
However, bar a few exceptions such as UBS, there is still significant room for improvement in implementation in
terms of accountability, capacity building, transparency and disclosure, and incentivisation.
The success of the Say on Climate campaign has caught the eye of a few banks that we have engaged with. We
encouraged them to consider preparing and submitting their climate plans to a shareholder vote.
Risk management
2
Environmental risk due diligence processes, including climate change, broadly focus on lending and project
financing activities, with clear gaps regarding risks stemming from underwriting or trade finance. Again, UBS
is leading the pack in this regard, fully integrating environmental and social risk management process across
business lines.
Banks are increasingly performing climate change stress testing and scenario analysis, but scope tends to be
limited. These assessments are generally performed for one or two high-impact sectors, and little detail on
assumptions used or outcomes is provided. We acknowledge this is a complex process, and that banks are still
building capacity, but expect efforts to accelerate and disclosure to improve in the coming years. We welcome the
work of industry initiatives such as the UNEP FI1 TCFD Task Force to advance the development and implementation
of climate change related stress testing. Barclays, Santander and Mizuho, among others, are active members
of the Task Force.
The UNEP FI (United Nations Environment Programme Finance Initiative) seeks to bring together banks, insurers and investors to create a
1
sustainable finance sector
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Disclosure
3
The majority of the developed markets banks in the scope of the project have published dedicated TCFD reports or
included TCFD-aligned reporting in their annual or sustainability reporting. We support such progress but note that
reports are usually missing sufficient details on climate-related implications for strategy and financial planning, as
well as on metrics and targets used to assess and manage relevant climate-related issues. We highlight the TCFD
reports from Societe Generale, Banco Santander and UBS as examples of good practice – they provide extensive
information on practices along the four key areas of governance, strategy, risk management and metrics &
targets. Barclays’ climate dashboard – which also references underwriting – can be considered industry-leading.
We expect that developments around making TCFD reporting and underlying practices mandatory in various
markets (such as the UK), will force banks to accelerate their efforts.
Banks in emerging markets
4
Banks in emerging markets significantly lag their peers in developed economies. All the firms we spoke to in
these markets are aware of the risks they face from climate change, and some have already explicitly included
climate in their risk factors. However, most of them have not yet set up appropriate governance frameworks or
developed robust strategies, which leads to their climate-related disclosures being very limited. We note that their
focus seems to be on climate opportunities, i.e. helping finance the transition to a low carbon economy, more
than on risks. Chinese banks in particular have ambitious green finance objectives.
Our engagement, individual or collaborative, has unfortunately not led to substantial movement in climate
risk management at banks in emerging markets. That said, we have seen some banks take meaningful steps
in the right direction, notably Malaysia’s CIMB, which announced its decision to exit coal financing by 2040,
and Thailand’s Kasikornbank, which has performed and published climate scenario analyses for high impact
industries in its lending portfolios.
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Net zero commitments are a
welcome development, but they
need to be supported by clear
emissions reduction pathways.
Our take on net zero
We have seen a wealth of commitments to net zero financed emissions (referring to those
greenhouse gases emitted by entities that receive financial services, such as loans). The six
largest US banks2 have now committed to net zero, and so have most of the major European
banks. Most pledges are around having “net zero financed emissions by 2050”.
We welcome these pledges, but have concerns that to exit coal financing, and review continued support
long-term ambitions, on their own, are insufficient to for the wider fossil fuels industry. We also expect
address the scale and urgency of the challenge. Net zero reporting, in line with the Task Force on Climate-
commitments need to be supported by clear emissions related Financial Disclosures. Finally, we support the
reduction pathways that feature short and medium-term introduction of “Say on Climate” votes, which help
science-based targets; considerations around capital investors hold companies to account on the quality of
markets businesses, such as underwriting; and strategies their strategies.
2
JP Morgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Citigroup and Morgan Stanley
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HSBC was receptive to engagement,
though it took a considerable amount of
investor pressure through collaborative
initiatives, and a separate shareholder
resolution, to achieve meaningful progress.
Case study:
HSBC and coal financing
As one of the largest banks globally with a substantial footprint in Asia, HSBC is a crucial actor
for climate risk management and financing the energy transition. Its strategy has lagged
behind its peers and general market development, only issuing an inaugural climate strategy
in 2020, which did not include underwriting targets or a comprehensive coal exit commitment.
Over the course of 2020 and early 2021, we had seven collaborative initiatives, and a separate shareholder
interactions with the bank, including several meetings resolution, to achieve meaningful progress.
with the Chair, the CEO and the Head of Sustainable
In early 2021, HSBC committed to phase out financing
Finance, as well as extensive exchanges with Investor
(including project finance, corporate finance and
Relations. We discussed the bank’s climate strategy, and
underwriting) of coal-fired power and thermal coal
its hesitation to stop coal financing.
mining in the EU and OECD countries by 2030 and
HSBC was receptive to engagement, though it took other regions by 2040. We will closely monitor the
a considerable amount of investor pressure through implementation of this commitment.
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Using our vote to influence change
In 2020, we introduced a dedicated climate voting policy covering companies in high-impact
industries, including financials. Under this policy, we will vote against selected management
resolutions at companies that fail to meet our minimum standards.
For the top 100 banks and insurance companies (based on election of directors, at 58 companies in the financials, oil
market capitalisation), we require them to: & gas, utilities and mining sectors.
(A) Acknowledge climate change has an impact on their We will evaluate dedicated shareholder proposals for
business. This can be done e.g. by listing climate financial institutions on climate change, climate risk
change as a risk factor in the annual report or their management, enhanced reporting or linked topics on a
10-K filing. case by case basis.
(B) Annually report against the CDP framework3. In 2021 we further enhanced the scope of the policy,
looking at the top 150 banks and insurers by market
If our research shows that a bank has both a robust exit capitalisation, and at financial institutions where BMO
strategy regarding coal financing and adequate public GAM has a substantial holding. We also introduced a
TCFD-aligned reporting, then we may judge this acceptable deforestation filter for banks that score “0” at Forest500’s
even if the above criteria are not met. Otherwise, we will evaluation. We consider this relevant as deforestation
cast a vote against an appropriate resolution. plays a crucial role for climate change and, therefore,
will push firms to develop as part of their climate risk
As a consequence of implementing our policy, in 2020 we
management strategies lending and underwriting due
voted against 61 management resolutions, such as the re-
diligence criteria for clients or transactions that are
potentially contributing to deforestation (e.g. forestry,
3
If considered in scope by CDP, i.e. asked to report. palm oil, soy, cattle/dairy farming).
Responsible Investment Solutions Page 8 Next steps Sustainable finance, including robust climate risk and opportunity management, is expected to be a crucial factor in the post Covid-19 economic recovery period. Going forward, we will incorporate the lessons learnt from our engagement so far to hold increasingly informed discussions with the firms under the scope of this project and with a wider range of companies – especially those still at the beginning of their climate change risk management journey. We look forward to continuing to collaborate with like-minded investors to encourage the industry align its various activities with the goals of the Paris Agreement, as well as to push for a more conducive regulatory environment. Ultimately, we want to help boards drive long-term sustainable differentiation in the marketplace for their firms, meet evolving stakeholder expectations, and manage climate risks and opportunities effectively.
Responsible Investment Solutions Page 9
Responsible Investment – a glossary of terms
Its wide-ranging nature means that responsible investment involves a host of associated language
and jargon. Here we explain some of the most commonly used terms.
Get to know the authors
Nina Roth, Director, Responsible Investment
Nina joined BMO GAM in 2019 as an ESG analyst. In her engagement she focuses on financial institutions and social
issues across sectors. Outside of work, pottery and the absurd world of crypto currencies are her passions.
Juan Salazar, Director, Responsible Investment
Juan leads engagement on a wide range of ESG issues with companies in emerging and frontier markets. Had the
intricate world of ESG not captured him, he would be tracking elephants across the African plains.
Contact us
bmogam.com
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recommendation or solicitation to buy or sell any companies that may be mentioned.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to
be reliable and are subject to change at any time.
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